Threshold effects and firm size: the case of firing costs

Schivardi, Fabiano and Torrini, Roberto (2004) Threshold effects and firm size: the case of firing costs. CEPDP (633). London School of Economics and Political Science. Centre for Economic Performance, London, UK. ISBN 0753017598

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Abstract

We study the role of employment protection legislation (EPL) in determining firm size distribution. In many countries the provisions of EPL are more stringent for firms above certain size thresholds. We construct a simple model that shows that the smooth relation between size and growth probability is interrupted in proximity of the thresholds at which EPL applies differentially. We use a comprehensive longitudinal dataset of all Italian firms, a country with an important threshold at 15 employees, to estimate the effects of EPL in terms of discouraging small firms from growing. We find that the probability of firms ' growth in the proximity of the threshold is reduced by around 2 percentage points. Using the stochastic transition matrix for firm size, we compute the long-run effects of EPL on size distribution. We find that average firm size would increase by less than 1% in steady state when removing the threshold; a quantitatively modest effect.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk
Additional Information:	© 2004 the authors
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HD Industries. Land use. Labor
JEL classification:	D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J65 - Unemployment Insurance; Severance Pay; Plant Closings
Date Deposited:	25 Jul 2008 10:41
Last Modified:	11 Dec 2024 18:37
URI:	http://eprints.lse.ac.uk/id/eprint/19956

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